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What's your debt position? Love it or hate it?

Sophie Elsworth on news.com.au this week said that 'home loan customers should be paying down their debt faster, as new research reveals that just one in four borrowers is ahead'.

Elsworth is suggesting that borrowers should be paying more than their required repayments but is it worth it? Isn't accepting the loan's timeframe the done thing? Why would paying extra help? It certainly feels like paying extra onto our home loans is like trying to fight a bushfire with a garden hose.

We think that debt is good to get you a home that you own and to further wealth but ongoing debt that isn't paid off can cause you hassles. Here's why we think that...

Let's look at what it takes for a home loan to exist:

  1. Interest rates

  2. A borrower or borrowers

  3. A bank or other lender

1. Let's look at interest rates first. The Reserve Bank reviews and sets the official cash rate each month. Currently we have had a historically low cash rate for over two years now. This is a great thing at first glance but it does mean that there is only one way for them to go and that's up!

Low rates are the best time to be adding extra into your home loan. Even small amounts can make a big difference. Think compounding interest but in reverse; pay more off the principal and pay less interest!

2. As individuals we hope to live to a ripe old age but the banks want us to be working ie to be able to pay off our loan/s. Several factors can place us in a position that is not a safe risk for a lender. Age starts to play a part; if you can't pay off the home loan by retirement age a lender can ask you to outline an exit strategy. We'll help you with preparing this document but the bottom line is that a lender expects you to have a plan.

Moving employers too often can make a bank nervous and so can having too many credit cards or having large credit limits.

3. Finally a bank or other lender gets to choose whether they will loan to you or not. We have many lenders that have differing requirements but the bottom line is that they want to protect their money. The better you are at paying down a loan (ie adding extra to your repayments) and minimising your credit risk, the more that a lender will consider you a good risk.

Of course, we're always here to walk you through your plans and loan needs to get you in the best position as quickly as you can get there. That's our gift to you!

Original article here.